Saturday 5 September 2020

Here is the magic key to unlock the path to a win-win post-Brexit deal

Barnabas Reynolds has, at the eleventh hour, discovered a "magic key" to solve all our Brexit negotiation problems. "Whizzo," I hear you say, and "Why has no one thought of this before?" A good question indeed.

Still, Steve Baker MP, chair of the European Research Group before handing over to Mark Francois (whoops) thinks it worth publicising the Daily Telegraph article in which Barnabas explains the magic key and how to find it under the Bridge Of Trolls (I paraphrase). On the other hand, Chris Grey, Emeritus Professor of Organization Studies at Royal Holloway, calls it "delusional drivel". It is difficult to know whose opinion to trust - a Brexiteering ERG eedjit or an enormously intelligent and learned professor who forms his judgement on knowledge and fact.

Anyway, for those who can't read the Telegraph's restricted content, here's the text of Mr Reynolds' article.

There is a "magic key" that would ensure the UK leaves the transition at the end of the year with full sovereignty and a highly attractive win-win trade deal.

Understanding how this key works requires an understanding of the implications of the half-built legal structure of the Eurozone and the processes that support it. The Eurozone’s structure, which artificially suppresses the euro currency value, leads to dumping of underpriced Eurozone goods on the UK market. Eurozone exporters are also subsidised through unique mechanisms, including the highly technical TARGET2 system. These represent systematic breaches of WTO law.

Additionally, the Eurozone structure and associated financial regulations provide artificially cheap banking that runs itself at the expense and risk of the rest of the world, in breach of international capital standards.

Dealing with these characteristics means the magic key needs to be turned three times - benefitting the UK, but also the EU.

The first turn of the key leads to replacing the Withdrawal Agreement and Northern Ireland Protocol at year end. The Protocol, if maintained, would deny Northern Ireland business operations the WTO’s protective shield of anti-dumping and anti-subsidisation measures that would safeguard them from unfairly priced Irish and other Eurozone imports.

If the EU fails to agree a satisfactory future relationship that properly respects UK sovereignty and its internal market - as the EU has committed to do - the UK can and should tear up the Withdrawal Agreement, including the Protocol, on the basis that the EU is in breach.

Once the Protocol is seen to be capable of falling away, the invisible north-south border is properly up for renegotiation and the dynamics will change instantly. The only solution that would avoid arguments over equal treatment with others and would satisfy Ireland is a truly invisible border. This would require the EU to strike an all-in deal with the whole of the UK that includes an FTA, since only then would it fall outside the WTO’s MFN equal treatment rules. And the more generous the FTA arrangements in removing tariffs and recognising UK standards, the less the EU would need to agree to place its reluctant reliance on the UK for the more complex joint arrangements for an invisible border.

True, the EU could refuse to agree a favourable FTA and wider arrangements to manage the border with the UK at year end. But the EU would then need to ignore the north-south border; or to adopt unilateral arrangements for an invisible border; or erect border posts.

Ignoring the border would likely lead to other Member States having to introduce checks for Irish goods going to and from the rest of the EU - effectively taking Ireland out of the Single Market. And, either ignoring the border or adopting unilateral arrangements would cause problems for the EU on its other 44 borders, since those countries would rightly ask for the same.

WTO non-discrimination rules require the EU to apply equal treatment to those borders absent a very good reason. Although the EU could cite security reasons for denying this to them, doing so would involve difficult discussions that it hitherto has managed to avoid. Finally, erecting border posts on the island of Ireland is something the EU and Ireland have repeatedly ruled out.

The second turn of the key justifies the imposition of WTO anti-dumping tariffs and countervailing duties on incoming EU goods. This would bolster the UK’s negotiating leverage. In negotiating an FTA, the UK would not give up those protections but could agree arrangements for enhanced transparency, notification and regular consultations prior to determining tariffs and duties - a considerable benefit to the EU.

The magic key should be turned a third time to ensure any FTA addresses services properly. The Eurozone is not just dumping products on the UK’s valuable markets; it is dumping financial risk on the UK and the rest of the world. At present, the UK mitigates that risk for itself and the world by ensuring that UK-based global financial institutions offering services across the EU do so under the UK’s regulatory regime, which imposes top-up requirements to mitigate Eurozone risk.

If the EU were to agree to an Enhanced Equivalence chapter in the FTA that recognises UK financial regulation, UK-based firms could carry on servicing EU customers from the UK cross-border and the UK could carry on performing its mitigating role. Other matters, such as the provision of data on Eurozone exposures and the recognition of legal services and of data protection standards, would need to be included to make this work.

If the EU were to refuse, the UK and the US (as the other host of global financial markets) would be obliged to impose punitive capital, collateral and liquidity requirements on all global exposures to EU financial institutions on worst-case assumptions as to Eurozone risk. This would include intra-group exposures to Eurozone-based subsidiaries of UK/US-headquartered institutions. It is demonstrable that EU law and supervision fails to address such risks.

These requirements would leave EU corporate and government customers with two options. Either reach out from under the blanket of EU law and purchase their financial services directly from London, as now (which is something they are entitled to do but which the EU is currently discouraging). Or face being significantly constrained in their access to the world’s capital markets.

Being subjected to international regulatory standards in this way would be very damaging to the Eurozone financial system and make it a pariah for not only failing to apply those standards to itself but also failing to cooperate with the UK in continuing to mitigate the risk for the world’s investors and savers.

Every indication is that the EU is keen to have a deal. They would prefer one that damages the UK (were the UK to agree to that), but when it becomes clear this option is not available, discussions will normalise rapidly. The only remaining point is to ensure clever transactional negotiation and sophisticated drafting of legal text, but that is for the finishing touches, once the magic key has been fully turned.


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